There are consequences associated with not paying interest to bondholders. Which of the following apply? I. Not paying an interest payment automatically puts the company in default making the entire loan due.
II) Interest on debt is not required to be paid, but the corporation generally pays it for public relations reasons.
A) I only
B) II only
C) Both I and II
D) Neither I nor II

Question

Quizplus · Accepted Answer

I is correct. Not paying the interest payment does put the company in default, which means the entire loan is due. II is incorrect. Interest on debt is a contractual obligation, and not paying it can harm the corporation's creditworthiness, so it is not just paid for public relations reasons.

There Are Consequences Associated with Not Paying Interest to Bondholders